Tenth Edition

Christopher Nobes

and

Robert Parker

Prentice HallFINANCIAL TIMES

/in/mprintof Pearson EducationHarlow, England • London • New York • Boston • San Francisco • TorontoSydney • Tokyo • Singapore • Hong Kong • Seoul • Taipei • New DelhiCape Town • Madrid • Mexico City • Amsterdam • Munich • Paris • Milan

Brief contents

Contributors xviPreface xviii

Part 1 S ETTING THE SCEN ESt I,,.., .X. ......,.-.:.N.'..,.. ...-..r^., ...-....'..•• .f.L.»....'....,..iil

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1 Introduction 32 Causes and examples of international differences 243 International classification of financial reporting 514 International harmonization 74

Part II FINANCIAL REPORTING BY LISTEDJ3R0UPS

5 The context of financial reporting by listed groups 1016 The requirements of International Financial Reporting Standards 1177 Different versions of IFRS practice 1458 Financial reporting in the United States 1579 Enforcement of Financial Reporting Standards 189

10 Political lobbying on Accounting Standards - US, UK andinternational experience 206

Part III HARMONIZATION AND TRANSITION IN EUROPEAND EAST ASIA

11 Harmonization and transition in Europe 23712 Harmonization and transition in East Asia 257

[PartisFlNANCIALj*fPORTING BY INDIVIDUAL COMPANIES

13 The context of financial reporting by individual companies 28514 Making accounting rules for non-listed business enterprises in Europe ^ 29315 Accounting rules and practices of individual companies in Europe 314

Part V MAJOR ISSUES IN FINANCIAL REPORTING BY MNEs

16 Key financial reporting topics 343

v

Brief contents

17 Consolidation 36818 Foreign currency translation 38419 Segment reporting r • 427

jPartVI ANALYSIS AND MANAGEMENT ISSUES

20 International financial analysis 45721 International auditing 48122 International aspects of corporate income taxes 51023 Managerial accounting 531

Glossary of abbreviations , 558Suggested answers to some of the end-of-chapter questions 563Author index 583Subject index 587

VI

Contents

Contributors xvi

Preface , xviii

Part I SETTING THE SCENE

1 Introduction 3Contents 3Objectives 3

1.1 Differences in financial reporting 41.2 The global environment of accounting 51.3 The nature and growth of MNEs 121.4 Comparative and international aspects of accounting 151.5 Structure of this book 18

Summary 21References 21Useful websites 22Questions 22

2 Causes and examples of international differences 24Contents 24Objectives 24

2.1 Introduction^ 252.2 "Culture 252.3 Legal systems 282.4 Providers of finance . 292.5 Taxation 332.6/ Other external influences 352.7 The profession 362.8 Conclusion on the causes of international differences 372.9 Some examples of differences 38

Summary 46References -p . 47Questions , . " ' . . 50

vii

Contents

International classification of financial reporting 51Contents 51Objectives " 52

3.1 Introduction 523.2 The nature of classification -\ 533.3 Classifications by social scientists 533.4 Classifications in accounting 553.5 Extrinsic classifications 563.6 Intrinsic classifications: 1970s and 1980s 603.7 Developments related to the Nobes classification 663.8 Further intrinsic classification , 67

j • • • •

3.9 „Is there an Anglo-Saxon group? 693.10 A taxonomy of accounting classifications 69

Summary 70References 71Questions 73

International harmonization 74Contents 74Objectives 74

4.1 Introduction 754.2 Reasons for, obstacles to and measurement of harmonization 764.3 The International Accounting Standards Committee 784.4 Other international bodies 874.5 The International Accounting Standards Board 91

Summary 94References 95Useful websites 97Questions k. 98

Part II FINANCIAL REPORTING BY LISTED GROUPS

5 The context of financial reporting by listed groups 101Contents 101Objectives c 101

5.1 . Introduction 1015.2 IFRS in the EU . ' . . • ' 1025.3 Adoption of, and convergence with, IFRS ; 1055.4 Foreign listing and foreign investing J 1065.5 Reconciliations from national rules to US GAAP and IFRS 1085.6 High-level IFRS/US differences 110

VIM

5.7 Reconciliations from-IFRS to US GAAP5.8 Convergence of IFRS and US GAAP

SummaryReferencesUseful websitesQuestions

6 The requirements of International FinancialReporting StandardsContentsObjectives

6.1 Introduction6.2 The conceptual framework and some basic standards6.3 Assets6.4 Liabilities6.5 Group accounting6.6 Disclosures

Contents

111113

114115116116

117

117118

118118125128130131

Summary 132References 132Further reading 133Useful websites 133Questions 133Appendix 6.1 An outline of the content of International

Financial Reporting Standards 134

7 Different versions of IFRS practice 145Contents 145Objectives 145

/ l • • • • /

7.1 Introduction 1457.2 Motivations for different IFRS practice 1467.3 Scope for different IFRS practice 1487.4 Conclusion 154

Summary 155References 155Questions 156

8 Financial reporting in the United States 157Contents f ' 157Objectives " 158

8.1 Introduction 1588.2 Regulator^ framework . 159

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Contents

8.3 Accounting standard-setters 1638.4 The conceptual framework • 1668.5 Contents of annual reports 1698.6 Accounting principles 1748.7J Consolidation 1818.8 Audit 1838.9 Differences from IFRS 184

Summary , , 186References 186Further reading 187Useful websites 188Questions 5 188

9 Enforcement of Financial Reporting Standards 189Contents 189Objectives, 189

9.1 Introduction 1899.2 Modes and models of enforcement 1909.3 United States 1949.4 European Union 1959.5 Australia 201

Summary 202References ' 202Useful websites 204Questions ( 205

10 Political lobbying on Accounting Standards - US,UK and international experience 206Contents 206Objectives . 206

10.1 Introduction 20710.2 Motivations for political lobbying 20810.3 Political lobbying up to 1990 21010.4 US political lobbying from 1990 22010.5 Political lobbying of the IASC/IASB 22410.6 Preparer attempts to control the accounting standard-setter 22810.7 Political lobbying of the FASB's convergence with the IASB 22910.8 Some concluding remarks 231

Summary , , 231References • ,r- 232Useful websites 234Questions 234

Contents

iPartlll HARMONIZATION AND TRANSITION IN EUROPE ' ' "" :I AND EAST ASIA j

II Harmonization and transition in Europe 237Contents 237Objectives 237

11.1 Introduction 23811.2 Harmonization within the European Union 23811.3 Transition in Central and Eastern Europe 244

Summary " 253References 253Useful websites 256Questions 256

12 Harmonization and transition in East Asia 257Contents 257Objectives 257

12.1 Introduction 25812.2 japan 25812.3 China 272

Summary 277References 278Further reading 280Useful websites 280Questions 280Appendix 12.1 ASBE Standards 282

Part IV FINANCIAL REPORTING BY INDIVIDUAL COMPANIES

13 The context of financial reporting byindividual companies 285Contents 285Objectives 285

13.1 Introduction 28513.2 Outline of differences between national rules and

IFRS or US GAAP 28613.3 The survival of national rules 28613.4 Financial reporting, tax and distribution 28913.5 Special rulesfor small or unlisted companies 290

Summary 292References 292

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Contents

Useful websites n 292Questions 292

14 Making accounting rules for non-listed businessenterprises in Europe 293Contents 293Objectives c 293

14.1 Introduction 29314.2 Who makes accounting rules? 29414.3 Which business enterprises are subject to accounting rules? 303

Summary _ 307References 308Further reading 309Useful websites 310Questions . . . 31TAppendix 1.4.1 Contents of the Plan comptable general 312Appendix 14.2A Financial accounting chart of accounts 313

15 Accounting rules and practices of individualcompanies in Europe 314Contents 314Objectives 314

15.1 Introduction 31415.2 France 31515.3 Germany 31915.4 United Kingdom . 324

Summary 326References 326Further reading 327Useful websites 327Questions 327Appendix15.1 Formats for French financial statements 328Appendix 15.2 Formats for German financial statements 333Appendix 15.3 Formats for British financial statements 336

Part V MAJOR ISSUES IN FINANCIAL REPORTING BY MNEs ;

16 Key financial reporting topics 343Contents J _ 343Objectives ^ " 343

16.1 Introduction 344

XII

Contents

16.2 Recognition of intangible assets 34416.3 Asset measurement • 34516.4 Financial instruments 34716.5 Provisions 35016.6 Employee benefits 35416.7 Deferred tax 35816.8 Revenue recognition 36216.9 Comprehensive income 364

Summary c 365References 366Questions 366

17 Consolidation 368Contents 368Objectives 368

17.1 Introduction 36917.2 Rate of adoption 36917.3 The concept of a'group' 37017.4 Harmonization from the 1970s onwards 37117.5 Definitions of group companies 37517.6 Publication requirements and practices 37617.7 Techniques of consolidation 377

Summary 381References 382Further reading 382Questions 382

18 Foreign currency translation 384Contents 384Objectives 385

18.1 Introduction 38518.2 Translation of transactions 38918.3 Introduction to the translation of financial statements 39518.4 The US initiative ' ; 39818.5 The temporal method versus the closing rate method 40118.6 FAS 52 40618.7 IAS 21 40918.8 Translation of comprehensive income 41118.9 Accounting for translation gains and losses 41318.10 Research findings^ 41918.11 Analternative to exchange rates? 423

Summary 423References 424

xiii

Contents

Further reading > 425Questions 425

19 Segment reporting 427Contents 427Objectives 427

1,9.1 What is segment reporting?. 42719.2 The need for segment information 43219.3 Disclosure regulations 43319.4 Evidence on the benefits of segment reporting 443

Summary 450References {, 451Questions 453

Part VI ANALYSIS AND MANAGEMENT ISSUES

20 International financial analysis 457Contents , 457Objectives 457

20.1 Introduction 45820.2 Understanding differences in accounting 45820.3 Disclosure practices in international financial reporting 46320.4 Interpreting financial statements 47020.5 Financial analysis and the capital market 474

Summary 477References 478Useful websites . 480Questions 480

2 1 International auditing 481Contents ' . - . . . 481Objectives . 481

21.1 Introduction • . . 48221.2 Reasons for the internationalization of auditing 48421.3 Promulgating international standards . 48921.4 The international audit process 495

Summary 507References 508Further Jreading ' 508Useful websites ii 508Questions 509

XIV

Contents

22 International aspects of corporate income taxes 510Contents 510Objectives 510

22.1 Introduction 51122.2 Tax bases 51322.3 International tax planning 51722.4 Transfer pricing 51822.5 Tax systems 51922.6 Harmonization 525

Summary 527References 527Further reading 529Useful websites 529Questions 529

23 Managerial accounting 531Contents ~ 531Objectives 531

23.1 Introduction 53223.2 The balanced scorecard as an overview tool 53323.3 Currency and control 53523.4 Variances and foreign exchange 539

'23.5 Culture and management accounting 54023.6 Control and performance 54923.7 Looking forward 551

Summary 553References 554Questions , 557

Glossary of abbreviations 558

Suggested answers to some of the end-of-chapter questions 563

Author index 583

Subject index 587

xv